"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Saturday, March 8, 2014

Most of you who are regular readers of this site are aware of my view that Western investment demand for gold can be gauged by tracking the reported holdings in the big gold ETF, GLD. While physical demand out of Asia is critical to the well-being of the gold market, I have maintained that without a correspondingly STRONG Western-based demand, gold cannot mount a sustained rally. Asia buying has bottomed or put a floor under the gold market for many years now but it is Western origin speculative demand that has driven gold strongly higher in the past.That being said, as of the close of trading Friday, reported gold holdings in GLD are at 805.2 tons. While this is up 1.5 tons from the last numbers (which were steady for the previous 8 trading days) it is still down from this year's peak of 806.25 back on February 13. Interestingly enough, the price of gold at the Comex closed at $1300 on that date. From that point on, it has ground higher before hitting a wall near the $1350 level. Yet the tonnage is lower. What to make of this?My view is that gold's recent rally has been driven PRIMARILY by short covering ( note - I am not using the word, 'solely' ). Here is a chart drawn from this week's Commitment of Traders report:

Let's start at the date of maximum hedge fund outright short positions. That occurred the week containing December 3, 2013 where the total number of outright short positions, including futures and options registered at 79,631. As of this Tuesday, that position has been drastically drawn down to where it now stands at 26,321, a reduction of 53,310. On that date, gold closed at $1220.80.Now let's look at the hedge fund outright long positions. The lowest number of those occurred during the week containing Christmas Eve at 104,754. Since that time, this category has now grown to 144,562 as of this past Tuesday, an increase of 39,808. Can you see what is taking place? Short covering continues to outnumber the fresh new buying in this market. Until I see some evidence of this changing, I cannot be too optimistic for the possibility of an EXTENDED move higher in gold. What seems to be happening with the metal right now is that certain events, more specifically, two previous payrolls reports and a geopolitical event, namely, the outbreak of tensions and strife in Ukraine, have spooked the bears into covering shorts.Until yesterday, Friday, the last two payrolls report, came in much weaker than expected by the market. Those reports immediately fanned the idea that the planned tapering activity by the Fed was going to be put on hold, especially with the dovish Yellen now at the helm. With that came the idea that Fed was also not going to raise short term interest rates any time soon. The result was FALLING longer term interest rates and a corresponding weakness in the US Dollar. With that, money came into gold while shorts covered but it was mainly nervous shorts wanting no part of getting steamrolled by the onset of a new "buy tangibles" wave in anticipation of Dollar weakness.Throw on top of that the fact that fears of escalation in the Ukranian situation caused a panic run into the metal and once again the bears were given no reason to get aggressive in selling. Quite the contrary, they opted to head for the hills first and ask questions later. What they are now doing is watching to see how events are going to unfold over in that volatile region.The big mover on Friday (yesterday ) however was not Ukraine, but rather the payrolls report. While not exactly a overwhelming display of healthy job growth, it was better than the previous two reports. Also aiding the report was an upward revision in the prior months of 25,000.But here is an interesting item in that payrolls report - the number of "not at work" due to "bad weather" was 626,000 compared to 253,000 in February 2013 and 200,00 in February 2012. ( Data courtesy of Dow Jones ). That shifted the psychology in the market to one of " we told you the poor job numbers were due in large part to the record cold and frigid weather conditions experienced over at least half of the continental United States". In other words, traders are coming around to the view that while the payrolls numbers are certainly not exactly setting any records, they were also not as bad as some were fearing and that the recent poor showings were weather-related and thus NOT THE START of a new trend.Now, it remains to be seen what we are going to get in subsequent payrolls reports but it will be very important to closely monitor those reports as the more seasonal weather slowly sets in. If the numbers DO NOT show strong improvement, then traders will re-evaluate their new attitude as of this Friday and shift back to ideas that the tapering plans of the Fed are going to be on hold. If the numbers do show steady, albeit very slow upward growth, then expect the Dollar to garner some support ( it is also sitting right near some very strong chart support ) and US interest rates ( longer term ) to stay firm and creep higher. Remember the Fed has emphatically stated that it is going to be "DATA DEPENDENT" ( their words, not mine ) when it comes to their approach to tapering and to short term interest rates.This will tend to work against gold, especially if the US equity markets continue to soar to new heights. Now they are talking 1900 in the S&P!Where this leaves us is simple - from a technical chart perspective, the near term technicals have improved in gold. This is keeping fund computers buying dips and preventing that category from getting aggressive on the short side. As long as any important downside support levels hold firm, gold should remain in a sideways type of pattern as the geopolitical uncertainties with Ukraine prevent bears from getting aggressive. Any sign that events over there are settling down and this market is vulnerable to a wave of long liquidation. On the other hand, if for any reason things flare up further, then gold will see further short covering that might be strong enough to take it up through the cap near the $1,350 region. It would have to clear $1,365 or so to have at least a chance of reaching the psychologically important $1400 level.Incidentally, before closing this post, I want to note once again the chart of copper.

This chart continues to amaze me to no end - with equities soaring into record territory seemingly every week, copper is sending the exact opposite signal in regards to the health of the overall global economy.Note the Directional Movement indicator show the bears in solid control of this market. Also, the ADX line is beginning to rise as the price descends indicating the increasing possibility of a trending move LOWER. Note - for that to occur copper would have to close below the $3.00 level in my opinion however. For now, it is in a sideways to lower pattern.The COT report for copper is also very revealing as it shows a continued build in SHORT positions by the large hedge funds. In addition to that however, what I find EXTREMELY fascinating is the positioning of the other players in the copper market. The big commercial category consisting of the Producer/Merchant/Processor/End User category is also a LARGE NET SHORT by more than 2:1! The Other Reportables category is also NET SHORT by 2:1 and the small trader, the general public is net short by nearly 6,000 contracts. The entirety of the long side interest in the copper market is being held by only one category of traders and that is the Swap Dealers, some of those no doubt being index funds which are oftentimes lumped into that category for reporting purposes. This is not something which one sees very often. But regardless, the fact that a combination of both commercials and speculators are short copper is astonishing given what is going on in the equity markets. It could be some are looking at credit issues surfacing in China and are bearish as a result.I said all that to say this - it makes me suspect this commodity sector rally we have been seeing. Some of the individual commodity markets do have strongly bullish supply/demand scenarios and thus their price rise is justifiable but if any of this buying is based on "hyperinflation" fears as some are suggesting, they are way off base because Copper would be leading that charge higher, not attracting the kind of determined selling that it has been getting of late.Let's continue to watch this closely...

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About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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